On 12 August 2005, a milestone was reached at the Global Compact when the Secretary-General endorsed our governance plan, paving the way for the next phase of our journey to embed core values in the global economy. In the past five years, the Global Compact has evolved from an experimental and hopeful idea to a movement put into practice by 2,400 companies and hundreds of other stakeholders.

The Global Compact has matured both as a concept and as an organization: local networks continuously emerge and now number close to 50; participants are submitting “Communications on Progress” by the hundreds, soon to be thousands; critical work with the financial sector is coming to fruition and the market is beginning to truly take notice of the value of values; and, importantly, the Global Compact initiative received broad-based, formal political support during the 2005 World Summit. As with any rapidly growing organization, reaffirmation and reorganization have become critical to ensuring the sustainability and accountability of our initiative.

Let me reassure you that the important mission of the Global Compact remains unchanged: to be the world’s most inclusive voluntary initiative to promote responsible corporate citizenship, ensuring that business, in partnership with other societal actors, plays its essential part in achieving the United Nations’ vision of a more sustainable and equitable global economy. Our new governance framework will provide the means for the Global Compact to be an initiative of greater focus, transparency and sustained impact, thus assuring our integrity and quality.

Due to the Global Compact’s expanding participant and network base, we now believe the best way to carry out our mission is by promoting greater ownership of the initiative by our participants and other stakeholders, as well as by bringing together global and local levels of Compact activities within a coherent organizational structure. That structure will include: a Board, Local Networks, an annual Local Networks Forum, a triennial Leaders Summit, the Global Compact Office and an Inter-Agency Team. Additionally, a non-profit foundation will be established to help fund Global Compact activities such as events and publications.

We are moving quickly to implement this new governance framework. For example, at the annual Networks Forum, held in September in Barcelona, issues of local governance and “Communication on Progress” took center stage. Preparations are underway to make a final proposal of board members to the Secretary-General by February 2006, with a first board meeting to be held in April 2006. Additionally, the Global Compact Foundation will be established by January 2006, and we intend for the Global Compact Office to be confirmed as an independent United Nations entity.

This turning point in the Global Compact coincides with a watershed moment for corporate responsibility in general. Finally, there are signs that the financial markets are taking environmental, social and governance (ESG) issues to heart. Hopefully, the moral case for upholding principles in business will no longer be the only reason to engage in corporate responsibility. From asset managers, pension trustees and securities brokers to project lenders and insurers, the investment community increasingly connects ESG performance to long-term corporate valuations. Articles contributed to this issue of the Compact Quarterly by leading professionals at UBS, Hermes Pensions Management, Generation Investment Management and Innovest Strategic Value Advisors attest to this shift.

In the article “The Financial Markets are Waking Up”, Gavin Power, the Global Compact’s Head of the Financial Markets Initiative, asserts that the buy-in of the investment community “could significantly alter international investment flows in ways that reward companies with a serious commitment to corporate citizenship”. This certainly would be a happy development for socially-forward businesses. However, a company’s realization of such financial value by the market will be highly contingent on its ability to credibly exhibit responsible performance in issue areas seen as material to viable business operations and risk perceptions. Clearly, the market will rigorously question implementation and accountability. We have received indications from the financial sector that the Global Compact’s “Communication on Progress” tool is a good starting-point for showing meaningful action on ESG issues.

Therefore, the time has come for our more than 2,400 participants to deepen engagement and truly embrace core values in business operations and thinking. The business case for the Global Compact is ever-strong; corporate responsibility is becoming a market imperative. I am confident that by implementing the principles and diligently communicating on action and progress, Global Compact participants with proactive policies and superb ESG performance will evolve as front-runners.

Many of our participants and friends have plans to attend the Global Compact Summit: China in Shanghai on 30 November - 1 December, and I look forward to continuing our important and lively dialogue there.

Sincerely,

Georg Kell
Executive Head

Actively managing risks and opportunities associated with emerging environmental and social changes is important at UBS in order to respond to the changing needs of the business world and our clients. Corporate social responsibility and socially responsible investment are not just about "soft" issues.
In our view, these issues are integral to corporate strategy and often may be directly reflected in company performance as defined by profitability, cash flow and risk. We view environmental, social and governance (ESG)-related costs as potential corporate social liabilities (or assets, when positive). This means that if ESG-related losses (or gains) can be identified and quantified they can then be incorporated into standard financial models. At this point, issues once seen by the industry as "soft" will be taken more seriously and fully integrated into the valuation process.

Pension fund trustees have responsibilities and rights as company owners, relating to their funds’ equity shareholdings. Most have delegated these to their fund managers and are unaware of how little is being done on their behalf, which is notable in light of significant external pressure on institutional investors to take corporate governance more seriously. In this article, Hermes Pensions Management’s Director of Corporate Governance, Colin Melvin, considers the reasons for the fund management industry’s apparent inability to provide an adequate ownership service and offers a solution, which could empower pension fund trustees on corporate governance and related corporate social responsibility matters.

Capital markets and capitalism are at a critical juncture. We all have a responsibility to determine the quality of economic growth we are seeking through capitalism. For years, the best long-term investors, research analysts and company executives have understood that the majority of a company’s value is determined by its long-run performance. And yet, the average mutual fund in America turns over 100 per cent of its portfolio every 11 months; quarterly earning targets are an obsession with research analysts; and in a recent paper by the U.S. National Bureau of Economic Research, 78 per cent of financial executives surveyed said they would give up some economic value in exchange for smooth earnings and 55 per cent of managers would avoid initiating a project with a very positive return if it meant falling short of the current quarter’s consensus earnings. The capital market’s obsession with the short-term will have significant negative repercussions for the vitality of the global economy. Asset owners and managers, research analysts, and company management must all re-align for the long-term. The health of our global economy depends on it. 

It is becoming increasingly evident that environmental, social and governance (ESG) issues can indeed have a material impact on companies’ competitiveness, profitability and share price performance. The opportunity is this: if the financial markets are provided with rigorous, credible information and analysis regarding companies’ relative and absolute exposure to ESG risks, then they will be capable of changing corporate behavior by punishing the laggards and rewarding the leaders. This was the logic underpinning the recent creation of a new information tool developed by Innovest Strategic Value Advisors: Global Compact PLUS. If the new GC+ tool can help divert the investment trajectory of the $40 trillion mainstream capital markets by even two or three degrees, it will have helped mobilize an unprecedented level of investment in companies with superior environmental, social and strategic governance performance.

Substantial changes are needed in the ways business schools prepare the next generation of leaders. The global business education market needs to challenge management education if it is to meet increasingly complex worldwide demands. Business schools need to demonstrate leadership by re-thinking management education, and this requires a significant change in the mindset of many faculty members. Corporate global responsibility issues need to be integrated across the curricula, not just in a stand-alone course. Business schools also need to embrace the concept that the common good is part of their responsibility and, like businesses, they need to move away from protecting outdated models of business-thinking.

Globalization has changed the ethical and strategic environment. Companies face a host of pressures to take responsibility for human rights and community needs. But where should they focus? How can companies leverage their capacities for maximal social impact? Could it generate financial returns if it’s done right? In the conversation, Dr. Andrew Kuper explains how businesses and citizen organizations can collaborate to provide exponential value for both. He lays out practical models and examples for how companies can move beyond conventional corporate social responsibility (CSR) to become “changemakers” – a topic that is explored in his latest book Global Responsibilities: Who Must Deliver on Human Rights?

Representatives from ABN AMRO and RealMicrocrédito meet with a microcredit client

Through microfinance, ABN AMRO can contribute directly to poverty reduction. Microfinance allows recipients to improve their work and trade skills, as well as build self-esteem. There is also a link between microfinance and the improved health and education of the children of recipients. Currently, ABN AMRO has plans underway to expand our efforts in providing critical financial services to the poor – by both escalating our current microfinance practices in Brazil and India and launching the service in other countries where the bank has a local presence.

Moving to advance the Global Compact principles by leveraging the full potential of local networks and by strengthening network governance, the Global Compact and the Barcelona Center convened the III Annual Networks Forum on 21-23 September in Barcelona. The Networks Forum brought together more than 120 participants from 44 countries, representing business, Global Compact networks, governments and the UN System. Download presentations from the meeting, which put the issues of local governance and "Communication on Progress" center stage.

Read about the launch of the Global Compact in Singapore, Tunisia and Bosnia-Herzegovina and learn how the Danish are inspiring local participants to engage in corporate responsibility.